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Wednesday, 5 August 2015

Disney - when do you buy? Some thoughts.

I wrote back in February about whether Disney had 'roared too much' at around the US$105+ level (link here) but the stock since then has broadly continued to climb.

But not today in the pre-market the shares are down around 8% to c. US$110 after the publication of the company's Q3 numbers after the close yesterday (Tuesday).

So what went wrong? In essence nothing in the formal numbers which showed good progress across all metrics (ex the free cash flow...which reflected investments in China which will be discussed more below):

Divisionally not too much stood out in the historic numbers either...

...with the company noting a solid studio release backdrop which kept their high profile (but only third largest divisional profit generator) Entertainment division moving forward:

However looking more at the detail for the large and important Media Networks divisions did highlight some negative profit progression in the most recent numbers in the broadcasting sub-division whilst the cable business (ESPN etc.) for the nine month on nine month period showed a modest profits decline:

So what was impacting? Programming costs are still rising (up mid-teens percentage year-on-year) but some cord-cutting behaviour meant that Disney acknowledged on the conference call such changes had ‘put pressure on’ leading to ‘modest sub-losses…vast majority due to decreases in multi-channel households’.

Of course the positive remains sport on ESPN and as the company noted ‘we all know how valuable live programming has become…96% of all sports programming is watched live’ but the above is clearly a worsening which the CFO factored into the guidance with the observation that not only will the strength of the US dollar ‘adversely affect net income by US$500m’ for FY16 but specifically on the cable division lower subscriber levels means revenue growth will fall ‘a bit short’ to a mid-single digit level.

And in a nutshell that is why the shares are falling.

Disney may have stated that ‘we feel great about our fiscal Q3 results’ and also may have announced US$6-8bn of buybacks (basically 100% of the free cash flow) for FY16e (or 3% 'yield' to augment the current 1.1% dividend yield) but in a firmer-than-average share that hurts.

But the conference call did highlight some other positives: (a) TV growth is not over - sees 5.5 hours of TV watching a day going to 6 hours due to new platforms; (b) very excited about the Star Wars film franchise potential: 'making no estimates re Star Wars as aware not all countries know the franchise as well as the US but hopeful of 2016 and beyond impact and market gets ahead of itself’; (c) resorts - 'huge anticipation' of the Shanghai China resort opening but it won’t contribute to group profitability until FY17.

Disney is a great franchise but like any stock if it gets ahead of itself any tempering of hopes will hurt.

So what price should you buy? Given the above bad and better aspects I stick to my guns at the US$105 level as being an initial point of interest for medium-term investors. Interesting to note as well the share price resistance in the chart above at that level.